The Co-Founder Mythology

I spoke at Stanford last year about starting a tech company. They really cleverly chopped the video up into small bite-sized segments.

So for anybody who reads my “This Week in VC” transcripts but doesn’t watch the video – this one’s for you! It’s only 3 minutes, 44 seconds.

I covered what I call “the co-founder mythology.” So embedded is this conventional wisdom in Silicon Valley that it feels like heresy to even question it. It’s a sacred cow, for sure.

So emotional is the topic that people often want to debate me based on the title before they’ve even heard my point of view. If you’re interested in the topic please watch the video by clicking on the image above.

Here is a quick summary of my POV:

When you start a company a 50/50 partnership seems obvious. Either you’re not technical and you think you need a technical co-founder or vice-versa

Conventional wisdom says that you gain far more in working as a team than you lose by diluting by half before you start.

Conventional wisdom doesn’t account for all of the things that go wrong in partnerships over time; especially ones that are formed quickly and without a long gestation period.

It is increasingly popular to have “founder dating” or “startup weekend hackathons” of some variety or the other. We get cast together with a team of people we barely know and if we win we gleefully announce we’re going to do a company together. We don’t even know whether they snore.

You often have very limited perspective on whether this person will continue to be a great partner 2 years down the line, 4 years down the line, 8 years down the line

Even if you *think* you know them, people change. One person gets more risk averse, the other has more risk appetite. One person gets married or has kids and starts to de-prioritize the business. One person loses the passion for what you do. Or you have disagreements about strategy, recruiting, funding, etc.

50/50 partnerships can be hugely unstable – even if you’ve been friends since high school.

And all of the hard work is ahead of you. You’re only going to find out whether they’re TRULY a great partner after you’ve put in years of money, blood, sweat & tears.

I think most people do 50/50 partnerships because they’re afraid to start alone. It’s scarier because if you fail it was only you and all your fault. Somehow it feels easier to leap together. I know. It’s what I did the first time.

I say, “go ahead & take the leap” if you want to start a company (many people don’t want to – that’s OK, too.). Hire your co-founder. Give them a large sum of equity. 20%. 30%. Even 40%. Vested over 4 years. If you ever fall out of love you have a pre-nuptial agreement. I talk about that in more detail here.

Truly treat them like a co-founder. Give them access to all confidential information. Involve them in fund raising, hiring, strategy, etc. Publicly call them a co-founder. Don’t rule like a dictator. But … if you have very big disagreements about funding, risk levels (e.g. like how much burn rate), whether to sell the company, etc. you won’t be backed into a corner or unable to make tough decisions.

Here’s the reality: most people don’t want to start a business. They don’t have an idea. They don’t want to come up with one from scratch. They don’t want the risk of the first 3-6 months with no salary and having to walk around with a tin-cup for funding. So most people join companies. That’s OK. It’s the more sane thing to do. Startups have high failure rates.

Most senior employees who join are given 2% if they join early. Maybe they get up to 10% if they joined REALLY early and were senior. Who gets 30%? Nobody. That’s who. So trust me when I tell you that you can hire incredibly talented people for 30% of your company. Or 20%. Let’s be honest – even 10%.

And here’s the thing – given that all of the hard work is IN FRONT of you (as in the next 8 years of your life) – why would you start out with an unstable position if you don’t have to?

I know many people reading this will violently disagree. And some of them will be from startups that are already very successful. If it’s working – no problem. I’m not saying it will never work. But many of the cases where it goes well are when the company hasn’t struggled. We’re all friends when things are moving up and to the right.

If you do decide to go down the 50/50 route, please at least consider:

Make sure you have founder vesting for both of you. It is not uncommon to see startup founders walk before raising capital and take large pieces of equity with no vesting. That means that the people who stay get to work their arses off to try and make money for the person that walked. Why risk it?

Make sure you have a very clearly established governance structure. None of this, “we’re co-founders, we just work well together. So we’re co-CEO’s” BS. Pick a leader. Have a clear path to resolving conflicts if they arise.

Discuss up front how you’re going to resolve any conflicts. Discuss topics such as funding, risk orientation, how long each of you wants to be doing this business, what happens when one partner wants to leave or one isn’t performing?

Just please read one more message first: I promise you for as great as you feel about your current partnership agreement – I meet far more people who had problems with theirs than founders who didn’t have problems. People just don’t talk about it publicly or in blogs.

I meet far more second or third time entrepreneurs who wouldn’t do a 50/50 (or 33/33/33) partnership ever again than you would image.

I am one of them.

Update: Russell Fradin makes a great point. If you’re already “been to war with them” in a company and know their character I would consider it more. There are some people you trust like family. I have about 2 of those.

Great post and thank you for asking why have equal cofounders? In tech this is the holy grail, however outside of tech, the concept of equal cofounders is just not prevalent. Finding the right cofounder is/was one of the hardest decision i made. It took me over 14months of dating where we had endless discussions about anything and everything. Looking back now, during the dating period is when we really understood each others personalities and learned how to respect each others different perspectives and judgements. More important, we learned when to back down and trust each others instincts. So when it came to formalising documents including how we manage conflicts, it was easier to accept our respective limits/powers. However, there is really no substitute to spending significant amount of time together first!

nannasin smith

I find the instagram equity split to be interesting – seems unbalanced.NE5532

Ryan Critchett

This is the fourth time I’ve read this post, and it resonates more and more each time. I think I may have even commented below. But I’m commenting again. – You’re just.. right here Mark. Particularly when 1 Founder is just a beast of a productive person.. (a real entrepreneur, a doer, etc) and the other, is just.. someone who wants to be involved in owning a business because it’s lucrative. Meanwhile, they have no idea of the psychology and skill it takes to muscle through a startup, and actually make it make money.

If there is the need for a clear leader, having a Co-Founder is probably a bad idea. Clear leaders are sometimes also assholes, which is great, because they’re asshole-ish about getting things done, and everyone else around them will feel like they’re being managed. Rightfully so, probably, because that person clearly has their stuff together.

A clear leader, someone who knows how to steer the ship, is better with people who will adhere to instruction, and help build a company that way. Moving into my next venture, I will not have a Co-Founder, and for great reasons.

Michael Barnathan

You may have had an atypical mother, but parents usually don’t make great entrepreneurial sounding boards because they will typically caution you to take the safe path. And entrepreneurship isn’t it.

Jonathan Buford

I completely agree. My first online startup, I went the route of 50-50 unvested split and had a very painful experience with attempting to rectify things when my co-founder wandered off the project.

My current company, Makible, I kicked it off myself and brought in partners after we already had revenue, so I’m in the position that I will be able to maintain control even after a large Series A funding round. When one of the early employees/co-founders didn’t work out, it was straight forward as to how to keep going without them involved.

One interesting point, here in Hong Kong, local employees do not understand or value options, so I’m having to look at other ways to create incentives.

Nolan Walker

Great post. The buck always has to stop somewhere; there always has to be one “grown up” in the group.

FunFunDate

Great tips! Thorough and insightful. I am writing an article about a similar topic and your article helped me gain a new perspective on it. Thank you!

-Emily, co-founder of Funfundate.com

Nikita Bernstein

You have gotta see the model that we came up with at FairSetup – takes the idea of co-founders/partners to an entirely new level: http://www.fairsetup.com